First Steps of Home Buying

Entire books have been written about the process of buying a home. But the initial steps in the process are the most important of all. This is when many first-time buyers make costly mistakes that come back to haunt them. So in this article, I’d like to focus on the initial steps you should take when buying a home — and how to do them right.

Establishing a budget. Checking your credit. Getting pre-approved for a mortgage loan. These are three of the most important steps during the first phase of the home buying process. Here’s how to navigate them.

1. Establishing a Home Buying Budget

“I don’t know how much I can afford to pay for a house, so I’ll just let the mortgage lender tell me. That’s what they do, right?” Wrong! A lender can only tell you the maximum amount they will lend you. But that amount might actually exceed the amount you can afford to pay. In other words, mortgage approval does not equal affordability. People often get approved for mortgage loans that are too big for them, and it’s the leading cause of home foreclosure in the United States. So before you start talking to lenders or filling out mortgage applications, you need to determine your home buying budget.

Setting a budget is easier than you might think. First, add up all of your monthly expenses (excluding your rent, which will go away when you buy a home). Be sure to include all of your monthly expenses, including the money you put toward savings, entertainment, groceries and bills. Next, subtract this monthly expense total from your net monthly income. This will give you an idea of how much you can afford to pay toward a mortgage each month. Do not exceed this amount — no matter what a mortgage lender might tell you.

2. Check Your Credit Reports and Scores

When you apply for a home loan, the lender will examine your financial background from all angles. Your credit score is at the top of the list. A high score will help you get approved for a loan with a good interest rate. A low score will hurt your chances of getting approved. There are things you can do to improve your credit score, but it all starts with finding out what your score is to begin with.

Request your credit reports from all three of the reporting bureaus: TransUnion, Experian and Equifax). You can do this for free by visiting AnnualCreditReport.com. Make sure there are no errors within your reports. If you find any mistakes, request a correction through the company’s website (the one that produced the erroneous report). You also need to check your credit scores, which are based on the information contained in your reports. You’ll have to pay a small fee to get your scores, but it’s important to check them. If your score is above 720, you’ll probably have no trouble getting a mortgage loan. If your score is below 700, you should focus your efforts on improving it. You can learn how to do this by visiting the MyFICO.com website.

3. Get Pre-approved for a Mortgage Loan

In step #1 above, we talked about setting a home buying budget for yourself. After you do that, you need to find out how much a lender is willing to give you. This is called pre-approval, and it’s an important first step in the home buying process. During pre-approval, a mortgage lender will review your financial situation and tell you the maximum amount they are willing to lend you. This will help you limit your search to homes you can afford to buy. Sellers will also take you more seriously if you have a pre-approval letter, because it shows them you’re capable of buying the home.

If you start your home buying process with the three steps listed above, you’ll be on the path to success. On the other hand, if you ignore one or more of these steps, you could have some unpleasant surprises and delays down the road.

Author's Note: The original version of this article was written by Brandon Cornett. Brandon is a consumer advocate and publisher of the Home Buying Institute. Visit the author's website atwww.HomeBuyingInstitute.com to learn more.